Where to Find the Best Canadian Small-Cap Stocks
One of the fun activities that comes with being a small-cap stock analyst is searching for new stocks to cover for Cabot Small-Cap Confidential subscribers. I’m not limited to certain sectors or geographies; I can cover Canadian small-cap stocks, U.S.-listed small caps or European small caps. If a company has a market cap under roughly $3 billion, it’s fair game!
I’ll often turn to the Canadian stock exchanges to see what’s going on just north of the border. When looking in Canada investors can lump stocks into one of two large buckets.
The first bucket is the Vancouver Stock Exchange. These stocks usually have market caps under $250 million and often trade for less than a dollar. You’ll find a lot of mining and oil and gas stocks in Vancouver, but some technology stocks too. For investors looking to narrow this universe down a little more they can start with the Venture 50 list.
The Venture 50 list is published at the beginning of every year by the TSX Venture Exchange. It covers the exchange’s 50 best-performing stocks over the last calendar year based on three equally weighted criteria: market cap growth, share price appreciation and trading volume amount. Additionally, each company must have a market cap of over $5 million and a share price greater than $0.25.
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That’s a big claim, I know.
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The second bucket is the Toronto Stock Exchange. These are comparatively more established companies and there’s a wider selection of stocks to choose from. Some companies go public directly on the Toronto Stock Exchange, while others uplist from Vancouver once they satisfy the listing requirements.
While broad market performance in both the U.S. and Canada has been spotty in the second half of 2019, a few Canadian small-cap stocks stand out as being worth your attention right now. Here are five to check out.
These Five Canadian Small-Cap Stocks Are Looking Good
Canadian Small-Cap Stock #1: Cargojet (CJT.TO, CGJTF)
In 2001, a Canadian discount charter airline named Canada 3000 was the largest charter airline in the world, delivering passengers to 90 domestic and international locations around the globe. But then the September 11, 2001 terrorist attacks destroyed what appeared to be a nice growth trajectory.
On November 9, 2011 the company’s fleet was grounded, leaving 50,000 vacationers stranded. Citing a 50% decline in air traffic, management declared bankruptcy, and the asset grab was on.
Out of that mess emerged Cargojet, a pure-play provider of time sensitive overnight air cargo services. The company is run by Ajay Virmani, who had acquired 50% of Canada 3000 just months before the Trade Tower attacks. He purchased the other half in February 2002 and has been the CEO and President of the company ever since. The company has a market cap of $771 million.
Cargojet’s pitch is that it delivers time sensitive air cargo across North America and select international locations utilizing its fleet of all-cargo aircraft. Its co-load network consolidates cargo from customers and gets it where it needs to go on time and without damage.
Destinations include 14 major Canadian cities and international routes between the U.S. and Bermuda, Canada and Germany, and Canada and Colombia and Peru. Specialty charter services are also available across North America, and to the Caribbean and Europe.
The bulk of revenue (58% in 2017) is generated through overnight services, with aircrafts charged out on an Aircraft, Crew, Maintenance and Insurance (ACMI) basis making up a smaller proportion (11.7%), and charter revenue making up the smallest amount (6%). Around 23% of revenue is classified as “pass through” revenue, which mainly includes fuel charges passed on to customers. Historically, the Canada Post Group of Companies and Air Canada have been major customers.
The company has performed well in recent years. In 2017, revenue grew by 15.7% to $295 million and EPS surged to $1.97 from $0.99. In the first nine months of 2018 revenue was up 21.8% and gross profit expanded by 9.1%. EPS has dipped slightly from $1.06 last year to $1.03 in 2018. At the current price the stock yields 1.1%.
With a steady growth profile, shares have trended higher for several years. There was an extended consolidation phase in early 2017 when the stock was stuck in the 42 to 50 range, but it broke out last fall and traded up to new highs above 65 by mid-March 2018. Another consolidation phase (in the 62 to 68 range) lasted until the beginning of August, then shares broke out again on the back of Q2 earnings and rallied as high as 87.5 in October. The stock’s pulled back a little since.
Canadian Small-Cap Stock #2: Atlantic Oil & Gas (EOG.V)
When I last wrote about Eco Atlantic in October the stock was trading around CAD 0.56. Given the meltdown in the price of crude oil since (down around 30%) you’d think this small-cap oil and exploration stock would have suffered too. But it’s up 30%! What gives?
First the backstory. Atlantic Oil & Gas’ exploration activities are focused on offshore Namibia and Guyana. As with most junior exploration companies, a lot of the pitch here is based on having great property that’s close to proven reserves.
In Namibia, the company has interests in four offshore blocks in the vicinity of blocks with farm-in activity from majors. It’s notable that Eco Atlantic is partnered with Tullow Oil, AziNam, ONGC Videsh, and NAMCOR, and is operator on three of the four blocks. In Guyana, Eco Atlantic is partnered with Tullow and Total.
The stock’s doing well because back in September Total exercised an option to acquire a 25% working interest in the Orinduik block, offshore Guyana, for $12.5 million. That capital is expected to cover Eco’s cost to drill two wells and reimburse the company for some back costs related to 3D seismic survey work.
Drilling activity is expected to begin in May/June 2019 and target the Jethro-Lobe prospect. The estimated chance of success is currently 45% and management believes there could be 250mmbbl of gross prospective resources.
Africa Oil (AOI.TO), a smallish exploration company that was the first to strike oil in Kenya, has recently taken a 19% stake in Eco Atlantic (for CAD 14 million) and that the company’s CEO Keith Hill was appointed to the board. This adds another layer of legitimacy to Eco Atlantic as Africa Oil has had relative success with its partner Tullow (and now Total and CNOOC too) in East Africa, even though the timeline to first oil there has been pushed back for years.
Eco Atlantic’s chart looks constructive going back a couple years, with a long consolidation period in 2017 broken up by a nice rally since Africa Oil came to the table last November. There was an extended consolidation phase in the middle of 2018 then the stock rallied to fresh highs in September when Total decided to step in. That strength in the face of a steep drop-off in the price of oil is impressive. With drilling activity starting in roughly six months next summer should provide some excitement for investors. Eco Atlantic has a market cap of $93 million, and trades in the U.S. as ECAOF.
Canadian Small-Cap Stock #3: Cronos Group (CRON)
Cronos Group was the first Canadian marijuana stock to gain listing on the Nasdaq (others have followed in its footsteps). The company is one of the top Canadian marijuana growers serving that country’s legal cannabis market. It has spread its reach through ownership of several smaller operators, each of which maintains its own brand.
Cronos helps with the brand development, growing technologies, capacity and distribution, and it has relationships in overseas markets, including Israel, Germany and Australia, to try and spur growth outside of North America. A joint venture with MedMen, California’s largest cannabis retail chain, is likely to help maintain growth on this continent too. Recent deals with Delfarma (Poland-based pharmaceutical wholesaler) and Cura (oils), plus a capacity expansion project, all serve to help Cronos expand its footprint around the globe.
But perhaps the biggest news is a recent $1.8 billion investment (roughly a 45% stake) from tobacco giant Altria (MO). It’s no secret that cigarette smoking is on the decline whereas cannabis is on the rise. Together Altria and Cronos are expected to work together on vaporization technology, pre-rolled cannabis products, product standardization and distribution.
Cronos has been growing quickly. Revenue was up 430% in Q2 2018 then another 187% (to $3.76 million) in Q3. The pace of growth reflects the early-stage nature of the company, which recorded just $550,000 in the first quarter of the year. Cronos is not yet profitable and delivered -$0.04 in EPS in Q3. The growth trend strategies to grow patient enrollment, begin bulk sales to other Canadian licensed producers, and export overseas, are working well.
Shares of Cronos were mostly moving sideways from mid-March through mid-August. They then rallied well above 10 and hit an all-time high of 13.75 in September. A big retreat to 6.8 occurred in October, but a rebound in the sector and then the Altria news has pushed Cronos back up above 12. It’s likely to continue to be a high-profile stock that will be volatile at times, but the long-term potential is certainly compelling. Cronos has a market cap of $2.3 billion.
Canadian Small-Cap Stock #4: Jamieson Wellness (JWEL.TO)
Jamieson Wellness is relatively new to the Toronto Stock Exchange, having just gained listing in July 2017. But the company has been around for almost 100 years! It was founded in 1922 and since then Jamieson has grown to be Canada’s leading branded manufacturer, distributor and marketer of natural health products. The company’s track record and focus on purity, potency and quality has helped it to become an iconic brand in the wellness industry. It has a market cap of CAD $817 million.
The company has two divisions. Its Jamieson Brands segment sells a full line of branded vitamins, minerals and supplements (VMS), over-the-counter remedies branded as either Jamieson or Lorna Vanderhaeghe Health Solutions (LVHS), and sports nutrition products branded as either Progressive, Precision, or Iron Vegan.
It also has a Strategic Partners segment through which it offers comprehensive manufacturing and product development services on a contract manufacturing basis to blue-chip consumer health companies and retailers around the world.
Broadly speaking, VMS and sports nutrition are two of the biggest and fastest growing areas of the consumer health industry. Jamieson is a way for investors to participate in this growth with Canada’s top-performing VMS company by sales, not to mention the country’s #1 consumer health brand.
In Canada’s food, drug and mass stores, the company holds 25% market share. But while its products are sold in 10,000 locations across Canada, you don’t need to live in in the country to enjoy the benefits; Jamieson distributes products in over 40 countries.
Sales were up 21% to CAD $300.6 million in 2017. Through the first nine months of 2018 revenue has grown by 6.6% while adjusted EPS has grown by 20% to CAD $0.54. Management expects revenue to grow by 6.5% to 8.5% this fiscal year (to CAD $332 – $337 million) and to deliver EPS of CAD $0.85 – $0.86.
Look for the company to continue expanding overseas, especially in China and India, the latter of which it has recently entered through an exclusive five-year distribution agreement with MedPlus, the second largest pharmacy chain in the country.
Until October and November shares of Jamieson Wellness hadn’t taken many breaks since it went public a little over a year ago. The stock climbed up near 19 soon after the IPO, then to 22.5 near the end of the year. A pullback and two-month consolidation between 20 and 21 set the stage for another rally, and shares hit an all-time high of 28 in June. That high was retested in September, then shares broke down and plummeted to 19 in November right after earnings were released. The stock has begun climbing back and is now back above 20. The long-term growth trajectory looks good, but clearly investors need to be prepared for some ups and downs along the way.
Canadian Small-Cap Stock #5: Questor Technology (QST.V, QUTIF)
Questor is a $71 million market-cap company that develops clean air technologies to safely and cost effectively improve air quality, energy efficiency and greenhouse gas emission reductions (including methane). Current systems include high efficiency waste gas combustion systems, power generation systems and water treatment solutions (which use recovered waste heat). The company also licenses its incinerator technology.
These systems are used in landfills, geothermal and solar projects, waste water treatment plants, cement plants and oil and gas drilling pads. The company sells and rents equipment and provides field combustion services.
Revenue was strong through 2014, but then fell off through the end of 2016. In 2017, sales came back strong and surged by 174%, driven by large volumes of rentals as well as rebounding sales of equipment. Earnings also jumped, to CAD 0.15 from a loss of CAD 0.02 in 2016. Colorado’s tight oil and gas plays in the Niobrara/DJ basin had been a particularly strong growth driver.
Through the first nine months of 2018 revenue has grown by 38% (to CAD 17.5 million) while EPS has nearly doubled, from CAD 0.11 to CAD 0.21.
The company hit some bumps in the third quarter. First, Prop 112 in Colorado was a divisive issue and had been expected to be bad for oil drilling activity in the state as it had the potential to multiply the setback between houses and drilling rigs to 2,500 feet. It would have done the same for water sources, which was estimated to rule out over 80% of nonfederal land in the state. It was voted down, but not before Questor’s stock sold off.
Second, a customer canceled an incinerator order after receiving just 75% of it, meaning $4.5 million was cancelled. Uncertain future expectations led management to cut capital spending during the quarter and divert some resources to North Dakota and Texas. It has begun spending again, but the market doesn’t like uncertainty and Questor had it in spades in Q3.
The stock rallied early in the year and traded up to a high of 4.53 in June. It then lost over half its value in July, August and September, eventually bottoming at 2.17. Since then it’s been able to make a series of higher highs and higher lows and is back around 3.40. The trend appears to be improving on the back of improving end-market dynamics, but investors should still expect some volatility in the stock.
The Best Small-Cap Stocks for 2019
I haven’t done a deep dive into any of these five Canadian small-cap stocks yet. And none have made the cut to be included in Cabot Small-Cap Confidential, where we have an average gain of over 40% in current stocks and over 50% in stocks sold in 2018.
But all seem compelling to me for different reasons right now.
As always, if you’re interested in getting my research on the best small caps in the world, start your subscription to Cabot Small-Cap Confidential by clicking here now.
Tyler Laundon is chief analyst of Cabot Small-Cap Confidential. The circulation of Small-Cap Confidential is strictly limited because the undiscovered stocks with sky-high-potential that Tyler recommends are often low-priced and thinly traded. Don’t share these recommendations!Learn More
This post has been updated from an original version.